According to the U.S. Small Business Administration Office of Advocacy there are over 870,000 small businesses in Michigan employing nearly half of all Michigan employees. Chances are many of you reading this article own a small business or have spent a large portion of your adult life developing your business into something that not only supports you and your family, but something of which you are very proud. Kudos to you! But have you started thinking about your Business Succession Plan?
Every business owner will eventually leave their company. What that looks like depends greatly on the planning that has taken place long before the decision is made to retire. Having an effective, well-planned exit strategy in place could mean the difference between your business collapsing shortly after you leave it, or thriving well into the future. The best plan will leave your business in capable hands, provide you with the financial security you need for retirement, minimize tax consequences and reward you for all those years of hard work. As with most major life events, advanced planning is critical.
Following are some of the major considerations that need to be addressed in planning for every business succession:
Have you identified who you want your successor to be?
- Do you want to keep the business in the family? If so, are they (probably your children) ready to take over? Have they worked elsewhere to gain experience and perhaps a different and/or better perspective on how to manage your business? Do you want to maintain any level of control after handing over the reins or are you willing to let the next generation run with it? What about other children who may not currently be involved in your business? Will they get a share of ownership? Will your children all be able to work together on a daily basis? Do non-family members who are key employees need to become stakeholders as well in order to keep the business moving in a positive and profitable direction?
- Perhaps you have no children or you’d rather sell your business to outsiders? How will you find a qualified buyer? How will you evaluate the business? Do you wish to stay on as a paid consultant or employee? What would that look like?
- Or lastly, do you want to wind down and close the business? If the success of your business has historically relied on a particular talent, skill or service that only you have, you may not even have a choice. The same could be true if you have no children who are able and willing to take over your business or if you just can’t find an outside buyer.
What do you want out of the sale or transfer?
- Regardless of who the successor will be, are you ready to relinquish all control and involvement in the business in order to retire or spend time on other ventures, or do you wish to continue to work with the business as long as you are able and desire to do so?
- Do you want/need the money at the time of transfer, or are you willing to be paid over time?
Have you kept everything up-to-date and transparent to make for easy transition?
- Are all corporate and financial records and other documents up-to-date? Think employee handbooks, job descriptions, policies and procedures, emergency preparedness plans, etc.
- Is your balance sheet cleaned up?
- Have you paid down or paid off any debts?
- Have uncollectible accounts receivable and obsolete or unused equipment been removed from the books?
- Have your insurance policies kept up with the changes in your business’ assets and revenue?
- Have serious personnel issues been dealt with?
- Have you identified potential issues or problems that could come to light further down the line? Correcting them now will make the transition go more smoothly and will increase what you walk away with.
Lastly, but most critical, have you given thought to the various tax consequences of different succession scenarios and have you made sure your Estate Plan is not in conflict with what you decide you want your final succession plan to be?
All this can be quite overwhelming. And balancing your personal, family and business interests can be a tricky proposition. But a good attorney with experience in succession planning, taxes and estate planning can make all the difference when it comes time to hand over your “baby”!